Debt Consolidation Loan or Debt Settlement Plan?
Is it Better to Consolidate Debt or Seek a Debt Solution?
Jul 9, 2009
Debt consolidation loans have grown in popularity as consumers have too many active credit agreements to be able to manage their finances satisfactorily. According to APACS, there are now more credit cards than people in the UK. Whilst the UK has a population of 60 million, there were 71.3 million active cards at the end of 2008. Whilst many consumers consolidate debt and make a single monthly repayment others prefer a debt solution, such as a debt settlement plan or Debt Management Plan.
How a Debt Consolidation Loan Helps
Individuals with multiple credit agreements, such as credit card debt, small loans, hire purchase or overdrafts, often find that personal finances are unduly complicated. Making monthly repayments to lots of different lenders not only increases the chance of a missed or late payment, it is normally more expensive. Consolidating debt with a loan is a way of combining all debts and making a single, affordable monthly repayment.
The Pitfalls of Debt Consolidation Loans
- Most loans are secured on the family home. Should a borrower default on the agreement, it can lead to home repossession. Try to consolidate debt with an unsecured loan. If this isn't possible, consider a debt solution, such as a debt settlement plan.
- Increasing the term of a loan may reduce monthly repayments, but it also increase the cumulative amount of interest paid over the loans duration.
- Consumers who choose to consolidate debt often make the mistake of borrowing more money than it needed. Taking a holiday or making an impulse purchase will increase debt.
- Using equity in the family home means that it may become more difficult to move or refinance in the future.
The Objective of Debt Settlement Plans
Whilst a debt consolidation loan is aimed at reducing monthly repayments, a debt solution is concerned with managing or clearing debt. A debt settlement plan is a means of writing-off up to 50% of unsecured personal debt, most commonly credit card debt, in return for a monthly repayment for a period of 3 to 5 years. Provided creditors agree, any outstanding debt is completely written-off.
The Downside of Debt Settlement Plans
A debt settlement plan can clear financial difficulties more quickly than a debt consolidation loan. However, there are a number of pitfalls associated with this debt solution.
- Few creditors will agree to a debt settlement plan unless several monthly repayments have been missed. This means that a debtor will have bad credit as missed and late payments will be reported to all major credit reference agencies.
- Debt settlement plans are front-loaded. This means that debt settlement companies will add their fees to any existing credit card debt. This will initially increase the amount owed meaning that it will take 4-5 months to clear the fees.
- The delay in receiving payment is likely to result in collection agencies continuing to make contact. This can be very unsettling for a debtor who believes that a debt solution has resolved all of their financial worries.
How Debt Settlement Plans Help
Consumers who have already missed or made late payments on credit card debt will find that a debt settlement plan is a better option than a debt consolidation loan. This is because a bad credit rating makes a loan more expensive due to the risk now posed to lenders. It is also sensible not to turn unsecured into secured debt as it provides creditors with collateral in the event of loan default. A debt settlement plan negates the need for further borrowing.
A debt consolidation loan is usually the right option when a consumer has a good credit rating and is in a relatively safe job. Should a consumer have missed or made late payments on credit agreements, a debt solution, such as a debt settlement plan, could prove to be more viable.
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